The European Central Bank (ECB) published a working paper exploring the link between monetary policy, money market funds (MMFs) and stablecoins. While people often view stablecoins as a safe haven in turbulent crypto markets, the ECB concludes they are not. It also finds that U.S. monetary policy is a major factor determining the volumes of stablecoins. “Monetary policy, in particular for the U.S. dollar, is the linchpin that connects crypto and traditional financial markets,” wrote the authors.
The analytical models explore a horizon of up to 12 weeks after an event, and found that stablecoin market capitalization drops by four percent in the three months following a negative crypto shock. Unsurprisingly, the same crypto shocks have no impact on money market funds. However, we’d observe that should stablecoins continue to grow and account for a larger proportion of Treasuries, it’s conceivable a crypto shock could impact money market funds in the future.
The other major scenario explored was a monetary policy shock, particularly the rise in interest rates. It had a dramatic impact on stablecoins, leading to a 10% drop in capitalization over the following 12 weeks. The ECB highlighted that this impact was far more substantial than the crypto shock. It concludes that holding non interest bearing assets in a rising interest environment drives investors towards traditional assets.
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